Martin Kronicle

The July – December corn spread is in an intermediate-term uptrend. In the corn market, this spread is known as the old crop / new crop spread.

Corn has been inverted — meaning the near months are higher than the deferred months. That screams of delivery. The market is penalizing storage, and you can see that in the chart. The December contract is about 80 cents below July, or about $4,000 per contract.

If the difference between the contracts were positive – a carry charge market – you’d expect the market to encourage storage if there were ample supplies of corn in the near term. That is not the case now.

Although volatile, the spread has been widening (getting more positive). When you think this is going to occur, you are inclined to purchase the spread. In corn, that is done by purchasing the deferred month of the spread (December) and selling the front month (July) against it. The July contracts expire on July 14.

For some perspective, that small leg down at the very end of the chart that is approaching the trend line was about a $750 pull back in the spread.

(click for larger and clearer image)

I wrote about coffee selling off last week. According to Jerry Toepke at Moore Research (MRCI), this is a seasonal tendency for coffee over the last 15 years.

Maybe the move has just started or maybe we’re just getting underway as the seasonal pattern suggests. You can get a 14-day risk free trial of Moore Research Center for yourself and take a look at how this trade is handled.

(click for larger and clearer image)

Several noteworthy analysts have mentioned gold along bearish tones recently. Personally, I don’t see it but that does not mean that I’m going to hang my a** out the window and leave my equity exposed. With the 20 day volatility number at just over $20 / ounce, it’s ENTIRELY possible that you could see a $60 down day in gold.

There are probably a few things you can look at in the gold chart, but like with clouds, if you look too long you’ll see whatever it is you’re looking for. The 1440 mark represents a level of support that is about 7% away from Friday’s close on the August contract. Looking at it another way, it’s a bout 5 ATR’s away from Friday’s close.

As for married puts, synthetic positions, and spreads…not for me in this market. If you trade small enough and use protective stops on your equity, you don’t need to hedge.

(click for larger and clearer image)

The S&P 500 has had quite a run since September, despite the choppiness since March. Ritholtz is now cleverly short via the ETF space and I think it’s a good call. But for emini futures traders, it’s a little more tricky.

(click for larger and clearer image)

We are all looking at the same charts, but here’s my take. Friday’s settlement of 1296.25 is about 3.75% below the downtrend line, which is all the way back up at 1345. Coincidentally, 1296 looks to be at near-term support, with the next level of support down at at 1255, just eye-balling it.

So what to do?

For the best reward-to-risk trade, I’d wait for the contract to rally towards the downtrend line and sell the reversal. The lowest risk to you would be to sell it short as close to the downtrend line as possible, but the price will tell you what you need to know.

The trick is to take your profits BEFORE the snap-back rally. In the chart right above, that would have been at Friday’s close around 1296.

If you’ve gotten short by selling a 20-day low, I’d say that you’re in a tough spot now. You’re likely short at about 1300 and change, looking to add more to your position in what I’d consider an oversold market. That’s not a risk that I’d be taking right now.

(click for larger and clearer image)

July cotton prices have risen approximately 100% since September and 30% in 2011, despite a large retracement from the 200 level. The 20-day ATR, what many traders use to look at volatility, has gone from 4.75 to 8 and back down to about 6.5 today. That means your position sizing has been all over the place.

How does you model adjust for spikes and large drops in volatility? You do adjust existing positions for increases in volatility don’t you?

(click for larger and clearer image)

As you can see, the market for cotton is inverted…the highest price is in the front month and it decreases each successive month. There are no carry charges. This market is saying “give us all you have right now.” The market will pay you about 15 cents per pound more if you sell today, rather than in October. You can look at that as a penalty for putting cotton into storage.

The rest of the months look almost the same. Here are the expiration months and the differences between the prices:

July – Oct = 15 cents
Oct – Dec = 12 cents
Dec – Mar = 11 cents
Mar – May = 7 cents

You can chart these spreads and watch them narrow and widen. It will give you a good feel how to trade spreads.

An article at agrimoney stated “Global balances are likely to ease over the coming months, with year-on-year higher production across key cotton producers,” BarCap analyst Sudakshina Unnikrishnan said on Thursday.”

With grains prices at all time highs, I’m not sure that farmers will be planting cotton in lieu of grains. It requires different machinery for harvest as well, so it’s not that easy to say “Hey, let’s try cotton instead of corn this year.”

The article continued, “Rabobank analysts remain bullish on prices, at least over the summer, flagging the “production risks associated with recent prolonged adverse weather conditions”, such as drought in Texas, the top producing state in America, which is the biggest cotton exporter.”

“The proportion of the Texas cotton crop rated in “good” or “excellent” condition was 33% as of Sunday, compared with 61% a year before, US Department of Agriculture data show.”

“More than 30% of the crop was rated in “poor” or “very poor” health – up from 3% a year ago.”

You may rely solely on fundamental analysis. You may rely solely on technical analysis. But frankly, you have to marry both to get the best picture. Then you watch how the market is behaving and how other traders are acting. Then you’ll be trading more like Michael Marcus, for example.